If you dig around in your junk closet at home, you'll probably find a cell phone from a few years ago or maybe a laptop from the 90s. Or, if you're like me, you've probably stubbed your toe on that 400-pound behemoth of a cathode-ray tube TV that you replaced with a plasma TV a few years back. You have to marvel at the fact that everything in that closet was once considered cutting-edge--and now it's just junk.
Technology moves fast. Every day, a lot of really smart people come up with ways to improve the things we do, making innovations from even a few years ago obsolete.
If you are a commercial underwriter, you know that technology has started to play an increasingly important role in how you evaluate and price your business. In the last several years, commercial underwriters have gained access to more and more tools for solving some of the most basic problems of location and risk.
In particular, spatial analytics, which became commonplace three to five years ago, are going through a sweeping evolution. While these new technologies will benefit the industry as a whole, taking advantage of them will mean upgrading to new solutions and thinking differently about location-related data.
Spatial analytics can be used to address two key issues commercial underwriters face today: 1) a lack of clear information regarding a given property; and 2) an absence of "granular," or highly detailed, risk data associated with that location.
Most insurers do not have a clear picture of the actual location of a given property. They often lack basic property data and risk data to help them make informed decisions. For example, in Florida, where the commercial market has softened 20 percent to 30 percent in the last two years because of reduced hurricane activity, insurers still need to be aware of a property's specific location and the structure's age. This information is needed to account for hurricane-driven perils like windstorm and coastal surge.
Imagine the problems that arose recently for an underwriter who had a large percentage of his values coded to the wrong state, when most of them were actually in Florida.
In another instance, an underwriter in London recently remarked that the information he received from his brokers rarely enabled him to validate the correct physical location and associated property information to help determine exposure to perils like flood. Because of competitive pressures, he was still writing the business, but did so almost blindly in terms of location.
The reason underwriters face these challenges is that the underlying technologies they use are not keeping pace with the evolving location-based technologies and information sets. In response to this problem, several industry leaders have sought to improve location technology and the underlying data.
Going far beyond simple "geocoding," significant advancements in technology and data collection have broadened the concept of "location" to include not only understanding a property's actual location, but also creating a link between property and risk information.
Traditional geocoding has historically relied on techniques like street-level interpolation--in which the geocoder "guesses" a location based on a street segment--or ZIP code centroids. These techniques can misplace properties hundreds, if not thousands, of feet from their actual locations, introducing a level of uncertainty that is unacceptable for managing and identifying risk associated with a specific property.
Geocoding granularity has improved exponentially with the advent of parcel-level geocoding technology. This approach assigns a latitude/longitude based on the center of the parcel on which a structure is located, thereby drastically reducing variances between a structures's reported and actual location.
Although several geocoding providers now offer limited parcel-based geocoding, the scope of geographic coverage varies significantly among vendors. When selecting a parcel-based solution, insurers should be sure to verify the extent of the provider's geographic coverage and the timeline for expanding coverage.
Another key evaluation point is whether the geocoding vendor can also provide reliable information about the property once the location has been determined. Commercial insurers need access to current property data that can tie the location to the appropriate property information, including year built, construction materials and even replacement costs.
Spatial analytics today also create the ability to incorporate parcel boundary data into the risk management process. Unlike a geocoding approach that assigns a single latitude/longitude to the entire parcel, parcel boundary data contains information representing the extent of the parcel boundary. This approach enables an insurer to consider the risk in terms of the entire parcel; for example, a result might show that 20 percent of a given parcel resides within a flood hazard area.
This is particularly critical when working with a customer to develop and implement mitigation strategies, or when an insurer wants to exclude or alter coverage on a commercial site with multiple buildings. Spatial analytics can also provide understandable observations of any concentrations of risk, like policy risk accumulation in urban areas or in relation to reinsurance policy thresholds.
REQUIREMENTS OF RISK INFORMATION
Underwriting in the 21st century requires a suite of products and services that offer a holistic, timely, granular, integrated and actionable view of risk. Risk metrics need to be applied consistently and continuously throughout the life cycle of the policy, from the receipt of the submission through quoting, binding, renewal and portfolio management.
Risk information also needs to be readily available at the time of underwriting and must be relevant to all the coverage provided, not just the marquee perils of earthquake, hurricane and terrorism. This requires availability of high-resolution geospatial data such as risk scores, satellite imagery and financial modeling, coupled with highly accurate, building-specific latitude/longitude.
Additionally, the information needs to be tied directly to risk-based underwriting rules and pricing guidelines that truly differentiate risk and reflect the corporate risk appetite. It is no longer acceptable to simply measure risk levels periodically at the portfolio level without ensuring that the production side of the business is properly aligned. It is only through the effective use of technology that this alignment becomes possible.
As with any technology, the capabilities of spatial analytics continue to improve and evolve. The improvements in location technology and natural hazard risk information should continue to provide commercial underwriters with a clearer picture of their business while helping them determine best practices for underwriting properties.
Finally, as underwriters seek to upgrade to these capabilities, they will need to carefully weigh not only the technologies themselves but also the quality of the data sets that feed them. It could make the difference between having a solution with an extended use and significant ROI versus one that will wind up in the junk closet.
DON PARKES is a senior director at First American Spatial Solutions with more than 13 years of catastrophe risk management experience. The First American Spatial Solutions division is a member of the First American Family of Cos. involved in property location information, analytics and services.
April 15, 2008
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